In general, preferential capital gains rates are not and should not be available for compensation for services. The tax bracket system attempts to adjust the level of tax to the standard of living for which the money is spent. Allowing some taxpayers to avoid the higher tax brackets for their compensation when the rest of the nation is subject to the ordinary rates is a kind of favoritism or caste system. The value of services should be set by market demand derived from real consumer utility. Tax should not distort the relative pretax values of services. Compensation for services is also not what is traditionally thought of as capital gain. Capital gain is gain from the appreciation of invested capital because of market forces beyond the taxpayer’s control. The lower rate on capital gain offsets perceived over-taxation of invested capital. There is a double tax under the income tax of both invested amounts (orchard) and profit from investments (apples). Tax on compensation, however, is a first and only tax; compensation has no basis because there has been no prior taxation of an investment. Capital gain rates, moreover, arose out of a tradition that capital gain had to be preserved for the benefit of heirs. The castle and manor were supposed to be part of the inheritance no matter what they were worth. Compensation has never been thought of as a necessary part of a taxpayer’s inheritance. This proposal would codify the general ideal that compensation for services is ordinary income, not capital gain, and apply it uniformly. It would amend section 1221 to provide that capital asset does not include gains attributable to labor input, compensation for services, no matter by what the form realized, and property whether tangible or intangible, held by the taxpayer whose personal effort created the asset or added substantially to its value. The proposal would eliminate capital gains rates now available for songwriters, inventors, and amateurs who make an asset for the first time. The proposal would, however, make C corporation stock a capital asset even when the shareholder creates or improves corporate assets as an amelioration of the double tax on corporate income. Sweat equity put into unincorporated sole proprietorships and partnerships, however, would be taxed as ordinary income when realized. If a taxpayer has basis in an asset, the proposal would allow the taxpayer to elect to allocate gain from a single asset between compensation, which would be ordinary, and appreciation of basis, which could qualify as capital gain, using a general index of appreciation, the taxpayer’s history of basis, and withdrawals from the asset of at least going interest rates. However, the accounting would be complicated, sometimes adverse to the taxpayer, and limited in value, so taxpayers might not make the election. This proposal is made as a part of the Shelf Project, which is a collaboration among tax professionals to develop and perfect proposals to help Congress raise revenue without raising tax rates. The deficit is $1.6 trillion or 11.2 percent of GDP, and federal spending over the next decade will be twice that. In the impending revenue crisis, base-protecting revenue provisions that were not possible under ordinary politics become political necessities. Tax rates cannot be raised on this loophole-ridden tax base. Shelf Project proposals defend the tax base and improve the rationality and efficiency of the tax system. They are intended to raise revenue without raising rates because the best tax systems have the broadest possible base to reach the lowest feasible tax rates. A longer description of the Shelf Project is found at The Shelf Project: Revenue-Raising Projects That Defend the Tax Base, Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, or 2007 TNT 238-37.